Morgan Stanley to pay US$1.2b to settle claims on bond sales

Morgan Stanley will pay US$1.25 billion to settle a US regulator's claims it sold faulty mortgage-backed securities to Fannie Mae and Freddie Mac that added to their losses in the financial crisis.

The investment bank took a US$150 million charge, reducing fourth-quarter and full-year 2013 earnings by five US cents a share, the New York-based bank said in a regulatory filing on Tuesday. That would bring last year's earning per share to US$1.36.

The Federal Housing Finance Agency (FHFA) sued 18 banks in 2011, seeking to recoup some of the losses taxpayers covered when the US government took control of the failing mortgage-finance companies in 2008. Seven banks, including JP Morgan Chase and Deutsche Bank, agreed to pay a total of almost US$8 billion last year to settle claims they sold faulty mortgage bonds to Fannie Mae and Freddie Mac.

Morgan Stanley said last month it added US$1.2 billion to legal reserves in the fourth quarter related to mortgage-backed securities litigation and investigations. Chief executive James Gorman had said that the legal charges were a "significant progress" towards resolution of matters.

The firm disclosed in a filing in November that the case involved the sale of US$11 billion of mortgage-related securities.

FHFA spokeswoman Denise Dunckel confirmed the settlement in principle. The agreement requires final approvals by the parties, according to Morgan Stanley's filing.